Proactive Investors - The upcoming merger between Hut 8 Mining (TSX:HUT) and USBTC is the biggest upside catalyst for Hut 8 stock, according to analysts at Canaccord Genuity (TSX:TSX:CF, LSE:CF) following the release of the cryptocurrency miner's first quarter results on May 11.
Hut is getting a lot from the all-stock deal, which assigns a roughly 50/50 equity for both entities, the analysts wrote.
“Not only is self-mining exahash (EH/s) capacity expected to reach over 7 EH/s but the pro forma entity also benefits from a large hosting business in Bitcoin (BTC) mining as well as a broad footprint in BTC data center managed services,” they wrote in a note to clients.
“Also, importantly for HUT, the acquisition materially ups the company's mix of cheap, green power in the US while providing more running room on the infrastructure side to continue to expand capacity.”
The analysts also highlighted that Hut would re-domicile in the US, gaining access to broader capital markets distribution with its Nasdaq listing.
“USBTC also has a savvy management team that we see as a big positive on strategy and running the day-to-day BTC mining operations, so we see a lot to like here in comparison to HUT standalone,” they wrote.
On the company’s 1Q results, the analysts noted that Hut's balance-sheet-first approach proved to be a solid buttress during the quarter against power fluctuation issues at its Drumheller site, which saw reduced EH/s output.
“We expect these issues to be cleared up over the next month or so, without any material loss of mining rigs,” they wrote.
They also pointed out that Hut, along with its crypto mining peers, was currently enjoying a mining windfall as demand for Bitcoin blockspace has skyrocketed due to the rollout of inscriptions, a kind of Bitcoin NFT.
“While we really can't predict how long this higher demand for blockspace will continue, at least in the short run it means nearly double the overall Bitcoin rewards for miners versus historical transaction fee contribution,” they wrote.
“This should help HUT maintain its hold on for dear life (HODL) during this period of reduced output until rigs at Drumheller get back online.”
Taking all this into account, the analysts repeated their ‘Buy’ rating on the stock but lowered their price target from US$5 to US$3. Hut is currently trading at US$1.85.
“Our $3 price target is based on 26x our 2024 EV/EBITDA estimates, plus the company's BTC balance,” they wrote.
“We believe the current valuation does not contemplate the benefits of the upcoming merger with USBTC, which should drive a doubling of hashrate while also materially improving margins.
“We also believe that over time BTC spot price will rebound, which we also incorporate into the target multiple valuation methodology.”